Assume That Policy Makers Are Pursuing a Fixed Exchange Rate

question 50

Multiple Choice

Assume that policy makers are pursuing a fixed exchange rate regime and that the economy is initially operating at the natural level.Which of the following will occur as a result of a evaluation?

• A)The real exchange rate will be permanently higher in the medium run.
• B)The real exchange rate will be permanently lower in the medium run.
• C)The effects of this devaluation on the real exchange rate will be ambiguous in the medium run.
• D)The nominal exchange rate will initially increase in the short run and then decrease in the medium run.
• E) none of the above

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Definitions:

Cash Basis

An accounting method recognizing revenues and expenses when cash is actually received or paid out, rather than when earned or incurred.

Selling and Administrative Expense

Expenses related to the selling of products and the management of the business, not directly tied to production.

Statement of Cash Flows

A financial report that summarizes the amount of cash and cash equivalents entering and leaving a company.

Income Tax Expense

The amount of income tax a company is obligated to pay to the government, based on its taxable income.